Why the U.S. Bailouts Won't Work...

... Yes, sorry, but the U.S. government bailouts are only serving to make the problem worse.

A friend related to me a brief analogy. It's summer and it's hot inside your house. Your air conditioning is broken so your next best alternative is to open the windows, but your windows in one room are stuck shut. The government proposes a solution to the problem: let's pay somebody to come and fix the problem, it will create jobs and stimulate the economy. The person comes and breaks your stuck windows, problem solved. Additionally, there are now jobs created for the window makers, who will make you new windows; the glassmakers, who will make new glass for the windows; the toolmakers, who make new tools for the glassmakers; and so on down the line.

BUT, what if you had hired a repairman yourself, who could have fixed your broken window without having to pay for the extraneous costs of cleaning up broken glass, disposing of glass, and then making a whole new additional window. This would still stimulate the economy, since the repairman gets paid the same amount you would pay the government's repairman, and that money in turn goes on to be reinvested on whatever the window repairman needs to live, etc.

Essentially the government is using taxpayer money to fund these bailouts. Money that we give to the federal governments is going into the pockets of people who the government deems competent enough to create necessary new jobs and stimulate the economy. However, this is a fallacy and directly contradicts free market ideology. Washingon has no special advantage when it comes to knowing how to allocate resources efficiently, and it doesn't. When it goes to create these new jobs and spread the bailout money across the economy, the rules being followed are not the rules of an efficient market, but those of the interest and opinions of politicians. Additionally, the taxpayer money that the government is doling out is going to the very people who created the problem in the first place. There is no recycling of human capital to motivate fresh talent with fresh ideas to take leadership responsibility.

History supports this argument. Japan recapitalized its banks in the early '90s and suffered a decade of stagnation and depression / recession (whatever you want to call it) that still plagues its economy today.

Media pundits continually claim that the Federal Reserve is following the prescription that has worked before during the Great Depression, but they fail to realize the fundamental difference between the current crisis we face and that of our ancestors. Then, the U.S. had a current account surplus - it was a net exporter. The economy was not based on debt or credit. Now, we are billions of dollars in debt with an immense current account deficit. This critical point is profound in its affect on the diagnosis and the prescribed antidote.

Please don't take this to be anti-patriotic or in scathing criticism. I am not by any means making claims to the incompetence of the American government in its inability to efficiently allocate capital. This is a fundamental aspect of free markets, though, that we are tampering with by attempting to force a return to confident spending. People may start spending again, but it will never be as efficient or effective in the long-term, and inevitably the market will correct to account for the inefficiencies that are created.